Thursday, September 28th, 2006
Do growth stocks outperform in recessions?
Now the US economy is slowing, many are touting the fact that growth stocks have historically outperformed as the economy moves to recession. The issue was highlighted by a recent article for the New York Times, which fleshed out two divergent views.
Ernest Ankrim, chief investment strategist at the Russell Investment Group, takes the conventional view. “In a slowing economy, people tend to look for growth wherever they can find it — and companies that can generate growth in difficult times will be rewarded,” he told the NYT.
A similar view is expressed by Forbes columnist Kenneth Fisher. He says that 9 to 12 months after the yield curve flattens, growth stocks start to beat value. (A flattening yield curve is considered a warning sign the economy is heading towards recession.) They continue to outperform until the curve becomes very steep. “The causal relationship is very simple,” Fisher said. “A flat yield curve reflects a reluctance of banks to lend to commercial borrowers. And value stocks are very borrowing-dependent, while growth stocks aren’t.”
Director of research and investment management at Research Affiliates, Jason Hsu, takes the opposite view that growth stocks outperform at the start of economic expansions and bull markets. This is backed up by a study by Ned Davis Reseach, which found growth performs better than value in the first third of a bull market. So when the economy slows, Hsu advocates a defensive posture by moving to value stocks. “Within the spectrum of growth stocks, you are going to see some companies that meet and exceed expectations, and they will be rewarded,” Hsu said. “But in a recessionary period, the odds for a lot of them doing that are going to be low.”
So who are we to believe? Personally, I think the yield curve flattening does have some impact, but if we become stuck in a bad recession then it would be difficult for growth stocks to outperform. When economies slow, central banks pump money into the economy, which is bullish for stocks. The outperformance of growth may just be a pricing in of that increase in the money supply. As the NYT article points out, growth stocks have beaten value stocks just after the Fed started cutting rates.
Perhaps ultimately it’s best not to worry too much about this issue and just follow the money. That means buying growth stocks when they’re under accumulation and trending up in a bullish market.
Word Count: 398. This entry was posted on Thursday, September 28th, 2006 at 9:22 pm and is filed under Value Versus Growth. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
